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Enterprise

What is penetration pricing? Definition + examples

By Abigail Sims
Published on June 30, 2025

Key takeaways:

  • Penetration pricing involves using low prices to attract new customers quickly, and companies often switch to more sustainable long-term pricing after successful market entry. 
  • This strategy works best in a price-elastic market, where pricing heavily impacts demand. 
  • Companies can use penetration pricing to gain customers and scale fast with low prices—but risk low value perception and price wars.


Penetration pricing helps companies acquire new customers by pricing a product or service significantly lower than a competitor. The goal is to increase awareness, market share, and ultimately the customer’s willingness to spend more money in the future.

This tactic is especially effective in the internet age, since customers can quickly compare your prices to those of competitors. And for the 71% of businesses that already operate online, it takes relatively little effort to market that lower price and attract new customers.

A recent example of using penetration pricing was the successful launch of Disney+, which was priced aggressively lower than rival streaming services, including Netflix, Hulu, and YouTube TV. But penetration pricing isn’t just for multi-billion-dollar corporations; it’s everywhere, from e-commerce platforms to your local grocery store.

In this article, we’ll break down some examples of penetration pricing and explore whether it’s an advanced pricing strategy that your business could use to increase sales volume.

Jump to:

Understanding penetration pricing

Penetration pricing is an acquisition strategy businesses use to attract new customers by offering lower prices than their competitors.

Companies commonly use this strategy when a new product or service needs to “penetrate” a competitive market. The business entices customers with a better deal in hopes of retaining them over the long run.

By setting an initial price below a customer’s expectations, businesses can potentially convert more sales faster than competing with established brands, products, or services using a similar price point. Then, after establishing your brand image and acquiring market share, a business considers price increases or upselling new products. 

When to use penetration pricing

Penetration pricing is a strategic maneuver that works best in particular situations. It's not a one-size-fits-all approach and not a long-term solution. The outcome is usually quick customer acquisition, but it can sometimes be other business goals. 

Penetration pricing might be a good option for you if any of the following are true: 

  • You want to gain new users quickly
  • You need to establish your brand in a new market
  • You aim to show product benefits quickly at a low price
  • You intend to disrupt competitors
A graph illustrating the percentage of business owners who plan to grow their business this year

How penetration pricing works

Penetration pricing involves selling your product or service without a profit (or even at a loss) to gain initial market entry. Once you have a customer base, you can increase your prices. 

Here’s a breakdown of how it typically works:

  1. Start with a much lower price: The company prices the initial offering significantly below the prevailing market rates for comparable products or services. This creates an immediate incentive for customers to try the new option—you're significantly cheaper than all your competitors. 
  2. Draw in customers: That attractive low price quickly captures the attention of price-sensitive consumers, so now you have a customer base. 
  3. Boost sales volume: Due to your lower price point, you'll experience a high volume of initial sales as more customers are willing to try your product or service.
  4. Build brand recognition: As more customers try the offering, brand awareness and recognition will increase. Positive initial experiences can lead to word-of-mouth marketing, so a good first impression is key here. 
  5. Slowly increase prices: After establishing a significant customer base and brand loyalty, you can gradually raise prices to more sustainable levels. The hope is that customers acquired at the lower price will remain, even with moderate price hikes.

In the end, you'll charge a competitive price for your product or service—it just might take a while to get there.

A graph illustrating penetration pricing for streaming services

Creating your own penetration pricing strategy

Penetration pricing might sound attractive if you’re trying to make a splash in a crowded mass market. But before you slash your prices or give anything away for free, you need a roadmap to implement this strategy effectively. Whether you’re selling snow cones or software, here are three crucial tips to keep in mind:

An infographic detailing how to build a penetration pricing strategy

1. Make sure your market is price elastic

For a market penetration pricing strategy to succeed, the market should be price elastic, which means a decrease in price spurs demand. Some examples of elastic goods and services include entertainment, professional services, and technology, while necessities like water and medicine tend to be less elastic.


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Before implementing penetration pricing, test a slight price reduction to see how sensitive your target market is to price changes and gauge demand response.


2. Understand how much loss your business can absorb

You might be willing to sacrifice short-term profits in exchange for long-term awareness, but it’s crucial to know when to draw the line. 

Slashing prices and promoting giveaways can work wonders for customer acquisition; however, the plan can quickly backfire if you don’t have enough reserve funds to manage those customers. This is why it’s so important to understand cash flow.


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Cash flow forecasting is your friend. Invest in a robust accounting solution that helps you estimate the amount of money expected to flow into and out of your business so you don't cut prices too aggressively. 


3. Build customer loyalty early

Penetrating a new market is only half the battle. Once you’ve earned a customer base, you must engage with them and cultivate meaningful, mutually beneficial relationships with a marketing strategy. Only then will they be willing to pay and stay.


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To foster lasting loyalty, consistently deliver excellent service, and build a community around your brand early, so customers stay when prices increase. 


Types of penetration pricing

You might have noticed a few variations on the same pricing strategy in the examples above. Let’s dive deeper into three common types of penetration pricing.

Low introductory price

Just as Frito-Lay did with Stax, you can offer a low introductory price for a new product or service as your “hook” to attract curious customers. Then, after you’ve generated enough awareness, you can raise the price to recoup any short-term losses you may have incurred.


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Always set a clear end date for your special! When using a low introductory price, clearly communicate how long the low price will last to create a sense of urgency to purchase.


Buy one, get one free

Also known as BOGO, this is a common penetration pricing strategy to incentivize consumers to engage with new entrants in a marketplace. For example, a new coffee shop might advertise a free small coffee with the purchase of $5 or more.

Free trials 

If you want to capture consumers’ attention, using the word “free” can go a long way. Free trials are most relevant for subscription business models, such as Amazon Prime. The goal is to impress your customers so much that they’re willing to pay to continue what they signed up for. Many businesses that offer free trials require a credit card number to begin charging the standard payment once the designated trial period ends.

Penetration pricing vs. price skimming

Price skimming is another customer acquisition strategy that utilizes the opposite approach of penetration pricing. Rather than launching new products or services at a lower price to capture market share, price skimming involves charging the highest amount customers will pay to maximize profit margins.

This may sound counterintuitive, but it tends to work well for luxury products where high earners adopters are willing to pay extra to be early adopters. Apple, for example, charges consumers a higher price for the latest editions of iPhones because they build brand loyalty and have a steady foothold in the tech market.


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Ensure your free trial provides access to the best features and demonstrates your subscription's most valuable benefits to increase the chances that customers will want to continue their subscription. 


Pros and cons of penetration pricing

Like any other important business decision, it’s essential to determine whether the advantages of penetration pricing outweigh the risks. Here are some important factors to consider:

Advantages

Low prices can quickly attract a base of early adopters.

Penetration pricing can generate high sales quantity, allowing you to realize economies of scale and lower your marginal cost.

Launching a product or service at a low price can catch competitors off guard, allowing you to snag new customers before the market has time to react.

Disadvantages

Low prices may signal to customers that your product or service is of lower quality than your competitors’.

Customers might switch back to a competitor if you raise your prices too much or too soon after your initial price.

Penetration pricing can lead to a price war with competitors where prices drop to unsustainable levels.

Penetration pricing examples

Depending on where you shop, you probably encounter penetration pricing weekly or even daily. From big-box retailers to the pizza shop down the street, businesses are willing to temporarily sacrifice profit margins for awareness and market share.

Let’s look at three penetration pricing examples in action and what you can learn from them.

How a local construction company could use penetration pricing to gain customers

Imagine you wanted to break into the residential construction market in a new area with your company, Ground-up Concrete Solutions. That could be tough, as developers and homeowners might be reluctant to switch from their established contractors. However, you could use a penetration pricing strategy to gain your first customers and build a reputation.

In this scenario, while established competitors typically charge $7,000 for a standard two-car concrete driveway installation, you could initially offer the same service for just $5,800 for the first five to ten new clients. This significantly lower initial price would quickly attract clients looking for a good deal.

With a low price like this, within the first six months, it's not unlikely that you'd secure a solid portfolio of driveway and patio projects. At this point, having demonstrated your quality and reliability, you could gradually increase prices to align with market rates, perhaps around $6,500-$7,000 for that same driveway.

Due to the established trust and the visible quality of your work, you would likely retain a strong percentage of your initial customers and even gain new ones through referrals.

Sunny Co. Clothing: The pros and cons of a viral swimsuit giveaway

Let's take things a step further and look at a real-world example. In the summer of 2017, two students at the University of Arizona came up with an idea to get attention for their swimwear line, Sunny Co Clothing, in a saturated marketplace: anybody who posted a picture of their classic red swimsuit (valued at $64.99) on Instagram would get a free one—just pay shipping.

Word of mouth propelled Sunny Co’s Instagram following from 7,000 to more than a quarter-million overnight. More importantly, 346,000 orders came through. 

But there was a problem: The sudden surge in sales forced the brand to cap the offer at 50,000 swimsuits, which caused a backlash on social media. Nevertheless, Sunny Co emerged from the situation with thousands of new loyal followers and an infamous legacy.

Two key takeaways from Sunny Co Clothing’s penetration pricing stunt:

  • A free product (even for a limited time) can be the ticket for long-term awareness and sales
  • If you make a bold offer, you'd better be able to back it up

Penetration pricing vs. price skimming

Price skimming is another customer acquisition strategy that utilizes the opposite of the penetration pricing approach. With price skimming, you charge the highest amount possible for new products or services.

Instead of entering the market at a low price with a new offering, this strategy involves setting a premium price point for a new product and then targeting customers willing to pay top dollar.

This may sound counterintuitive, but it works well for luxury products where high-earner adopters are willing to pay extra to be early adopters. Apple Inc., for example, charges consumers a higher price for the latest editions of iPhones because they build brand loyalty and have a steady foothold in the tech market.

Other types of pricing strategies 

Businesses use various pricing strategies to optimize revenue, market position, and customer relationships throughout a product or service lifecycle. What works at one point in the market or in the product's lifecycle may not work for another, so consider all the available options and choose accordingly. 

Here's a look at some other common pricing models:

Value-based pricing

Value-based pricing centers on the perceived worth of a product or service in the eyes of the customer, rather than solely on the cost of production or competitor prices. 

If you're using this pricing model, you're probably more concerned about the value you bring to clients than what your competitors are doing. 

For example, a project management software company might charge a premium because leadership can demonstrate the product's ROI. By proving that the product saves teams significant time and improves collaboration, they can justify a higher price point.

Freemium pricing

Freemium pricing is a tiered pricing strategy. Typically, a basic version of a product or service is offered for free, while more advanced features are available through paid upgrades or subscriptions. This strategy aims to attract a large user base with the free offering, with a percentage of those users converting to paying customers over time. 

Ponoko is an excellent example of this pricing model. They're a manufacturing company that provides an online platform for custom laser cutting, 3D printing, and other digital fabrication services. Anyone can add their files and access free design guides and tutorials to improve those designs. Printing the designs, however, will, of course, cost you money. 

Loss leader pricing

Loss leader pricing involves selling a product below market cost to attract customers, with the expectation that any loss incurred will be recouped in other sales to that customer. 

Grocery stores like Walmart or HEB often use this tactic. It's not uncommon to see steep discounts advertised on popular items like milk or bread, which would cost the store money to offer if customers didn't purchase other groceries during their visit.

Predatory pricing

Predatory pricing is an aggressive strategy in which a company sets extremely low prices for a product with the deliberate intent of driving competitors out of the market. After eliminating competitors, the company may raise prices however it likes. 

This is illegal in the US and generally frowned upon—but many companies skirt the law anyway. 

For example, the rideshare service Uber faced lawsuits in 2016, 2020, and an FTC investigation in 2025 over shady pricing practices that included predatory pricing. 

Their business model was simple: Offer rides at extremely low prices to drive other rideshare options out of business, then jack up the prices. This model remains a subject of controversy today. 

Is penetration pricing right for you?

Trying to elbow your way into a crowded marketplace is a tough task. Even if you’re confident that your business can compete with established brands, you still need to give your audience an incentive to switch—and in some cases, that incentive is saving a few bucks.

If your market is price elastic and you have enough funds to sustain thinner margins, penetration pricing may be ideal for customer acquisition. Just remember: You’ll need to work hard to establish brand loyalty and recoup lost revenue after you get your foot in the door.

A penetration pricing deal can be a mutually beneficial pricing strategy with insightful planning and attention to detail.

Boost productivity and enhance profitability 

Penetration pricing is a great way to enter a crowded market and attract customers quickly. While it requires careful planning and a clear understanding of market dynamics, this advanced pricing tactic can be a highly effective customer acquisition method when implemented strategically. 

If you're looking to add penetration pricing to your business's financial strategy, you'll want the right tools for the job. Streamline your operations with Intuit Enterprise Suite so you can stay in control of your business finances. 


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